Assignment no 2

Topic: Islamic Banking: Difficulties and their solutions

Introduction:
Islam is not only a religion, but a way of life, which has given adequate
guidance on each and every aspect of life, including that on business,
finance and economics.

The foundation of Islam is based on principles of

‘equality & justice’. If we take guidance keeping the
aforementioned points in our minds, then perhaps it would
be easier for us to understand message of Al-Quran.

Difficulties and their solutions

Issue (I):

Islamic finance transactions are being bench-marked  with prevailing

interest rate in the country.

Solution:

Islamic finance deals should be benched-marked with expected / future

price of that specific commodity, in which deals are being executed. Plus the
deal must be made for real (sale / purchase of) commodities.

Conclusion:

Yes, now it will be riskier, but it will not be forbidden.

Issue (II):

Deployment of Funds; it is easy for Islamic banks to solicit deposits, in the

name of Islam, but its profitable deployment  is an issue.

Solution:

Islamic banks should ensure that each penny, which is being solicited from
depositors, must be placed in; (a) productive ventures, (b) strictly as per
Shariah.

Issue (III):

Islamic banks do not enter into ‘Musharaka &

Modaraba’ transactions, because of risk factor and instead resort to
interest-bearing deals.

Solution:

Islamic banks should halt the process of accepting fresh deposits, if it cannot
find adequate Shariah compliant avenues.

Conclusion:

This is how bad inflation can be checked. Otherwise, it is only ‘greed of

interest’, which continues to motivate banks to solicit incremental
deposits, in order to successfully deploy the same through ‘interest based
deals’ i.e. especially, in the interbank money markets.

Issue (IV):

The loan contracts are religiously being signed between banks and the
borrowers, but there are no properly executed agreements
between the banks and its depositors. All the latter signs-off is; the
account opening form (with fine details) and get deposit slips.
Solution:

There should be proper Shariah compliment contracts between depositors

and banks properly spelling-out terms & conditions under which the funds
are being solicited by banks and what would be banks responsibilities. So
that depositors may also safeguard their interests.

Conclusion: 

Now it will be a fair deal confirming principles of Islam based on ‘equality &
justice’.

Issue (V):

Once, banks takeover money from depositors they become its (unjust)
owners and thus do not include depositors in any; decision making and
shareholding. This is also against the basic principles of Islam. Allah SWT has
also referred ‘wrongful appropriation of other peoples’ property’ in verse
no. 4-161.

Solution:

Depositors should be included in both (a) decision making

and (b) they should be part owners (shareholders) of Islamic
banks, as otherwise there is no difference between an Islamic or a
conventional bank.

Conclusion:

 Now it will be a fair business relationship between the two.

Issue (VI):

Banks extend loans or similar credit facilities to borrowers. Whereas in

Islam; debt is not permissible, as money making option. In Islam the concept
of debt is only for financially weak people.
Solution:

Therefore, the banks contribution towards a borrower should be in shape of

equity or under fund management scheme.

Conclusion
These are only a few basic issues, which must be addressed in the first phase
on a related forum comprising of regulators, Shariah advisers, Islamic finance
professionals etc. Otherwise, whilst violating the basic principles of Quran &
Sunnah our societies & economies will be exposed to numerous
weaknesses, which will witness disasters on a regular basis.

 May Allah SWT guide us to understand HIS words in its true sense
(Ameen)

Reference:
Muhammad Rizwan ul Haque (Founding chairman, Dawood
Family takaful / Director of a trust and S.E.V.P at an investment
bank)